Should We Self-Insure?
A Re-assessment with the Coming of Kid 2
Hello folks! As always, thank you for visiting The Green Swan. Lately I’ve been forcing myself to reassess at a few legal and financial matters that will be impacted by having a second kid. It is never a fun process to dig into Wills, checking beneficiaries, analyzing life insurance considerations, etc., but it is very important. It is one of those things that the likelihood of ever coming into play may be very low, but the impact would be very large if it ever does. Sort of like a Black Swan event, the namesake for how I derived The Green Swan!
Also, my benefit enrollment period at work just came up which served as a reminder for me as I needed to decide if I wanted any term life insurance through my employer’s plan. So I thought I’d lay out some of my recent considerations (to thereby force myself to do the work) and also to get feedback from all my helpful readers to see if I’m letting anything slip through the cracks or failing to consider certain things. And lastly, hopefully this post can serve as a guide for any other folks out there about to have a child or other major life events.
So without further ado, let’s jump into it!
Liabilities and Concerns
It is important to reassess the need for life insurance at every life stage. As I detailed previously in a guest post on Distilled Dollar blog, my focus has been on what obligations would be left behind for my spouse and kids. I will use this as my basis for determining what, if any, coverage I need and not simply a calculation of so many multiples of my annual income or other bogus metrics and rules of thumb. My wife doesn’t need to have a windfall if I end up passing early, and likewise, if my wife were to pass early I don’t need a windfall either. I always remember my Dad saying, half-jokingly, that you don’t want to be worth more dead than alive…
With that background, what sort of liabilities will I be leaving behind? And note that this analysis is focused on me passing early but could just as easily be flipped to my wife…the same considerations and ultimate conclusions for us wouldn’t change. For us, the primary focus is on leaving behind a home mortgage and two kids.
The Home Mortgage
Fortunately though, our home mortgage isn’t huge and the ongoing mortgage payments, including insurance, taxes, and utilities, would be within the means of my wife to continue to pay with her ongoing employment income.
Alternatively, she could downsize the home. I don’t know that I would necessarily recommend this though, as we live in a good school district for our kids and it would be an added hassle for her. If she were to downsize though, I would suggest it be in the case of wanting to move back closer to other family (if she felt the need).
And lastly, another consideration for my wife would be refinancing the home to make the annual mortgage payment more manageable (stretching the current balance out over a fresh 30 year period). This would be a feasible option as we have paid off a good portion of it and a new 30-year mortgage would help spread out the repayment more.
Kids are expensive, but as parents we do control that to a degree. While kid expenses have been reasonable for us so far, it is hard for me to gauge the costs as they get more involved in activities and also begin to devour food like they are offensive lineman.
For the sake of being conservative, I think it is fair to estimate approximately $10K per kid per year. This would include the continued use of daycare in younger years, and that expense being replaced by greater budgets for activities, food, and clothing as they age. Soon to have our second kid, this would be $20K annually.
This would still likely fit within a reasonable budget for her, but wouldn’t leave much room for continued contributions to retirement investments.
Additionally, my wife and I have always planned to pay for a meaningful portion of our kids college expenses (if not the entire amount). Fortunately, we’ve been very active in establishing and investing in 529 accounts. The 529 account for our first born will be fully funded next year with no real ongoing contributions necessary, we’ll just be relying on compounding over his next 15 years before college.
We will also begin contributions for our second child’s 529 next year. Our plan today is to put approximately $70,000 or so into each account with contributions early in their lives to take advantage of the tax benefits as they compound. Funding the 529 account for our second kid is a note-able issue for my wife to fulfill to some degree, depending on when my untimely death would be of course.
We do currently have a car loan. There is a $24,000 balance right now and the value of the car, per Kelly Blue Book estimates, is approximately $21,000. We also have a second car valued at approximately $4,000 with no loan. The easy solution would be to sell the second car since it would no longer be necessary.
My suggestion to my wife would be to sell the old car and use that money to pay down the loan on the new car. The new car is nice and bigger and keeping that will be more hassle free than keeping the older car. The ongoing loan payment would be manageable for her. She could sell some investments to pay this off if her income is too stretched though.
Burial costs definitely need to be considered and shouldn’t be underestimated. Costs can easily run $5K-$10K. Plus, it is fair to assume a period of grieving where Lucy may prefer to take some time off work. Everyone reacts differently to these situations, so it is hard to say. On the flipside, she could be very motivated to return to work to take her mind off things. Either way, there will be meaningful “transition” costs.
While it is important to note all the meaningful costs that we would be leaving behind for our spouse to fully bear, there are also benefits we need to consider which will be different for everyone. For my wife and I, the survivor benefits we need to consider include employer provided life insurance, social security survivor benefits, and our existing investment portfolio.
Employer Provided Insurance
For both my wife and I, our respective employers provide $50,000 in life insurance at no cost to us. This money would go to our spouse (the designated beneficiary) upon death. I view this bucket to cover the burial costs with plenty left over.
The remaining left over could perhaps be used to fund the remaining amount needed to fully fund Kid #2’s 529 plan, paying off the car loan, moving costs if my wife decided to downsize or move closer to family, or other miscellaneous expenses such as daycare.
My wife and I have both worked long enough, and earned enough “credits” in terms of how much we’ve paid into Social Security, to be able to draw survivor benefits if either I or Lucy were to die. These benefits would include a payment for the surviving spouse and additional amounts per child.
I recently pulled up my most recent estimate of Social Security Survivor Benefits online and I’d recommend you to do so as well. You can create an account at My Social Security.
If I were to pass early, my family survivors would receive total family benefits of about $5,000 per month. Although if my wife were to keep working (which we’d expect to be the plan) some portion of these proceeds would be taxable. And, alternatively, if Lucy were to pass early, the total family benefits for me and the kids would be about $4,000.
Even if these were taxed on a federal basis and the net proceeds were $4,000 and $3,000 per month ($48,000 and $36,000 per year), respectively, this is still meaningful especially considering the relatively frugal lifestyle we are accustomed to. This alone would cover the majority of our annual expenditures.
Our Investment Portfolio
As I mentioned in the Net Worth Explosion post, our investment portfolio is currently in excess of one million and growing significantly each year we are both alive and contributing. This alone could provide a significant source of income for a family, especially with one less mouth at its teet.
Assuming a safe withdrawal rate of 3.3%, this portfolio would provide $33,000 of funds available per year, a very conservative estimate in my mind which should allow for the portfolio to continue to grow and kick off the same nominal amount indefinitely (and I think Libre and ERN agree with this safe withdrawal estimate).
Similar to the Social Security benefits mentioned above, this amount could cover the majority of our annual expenditures. But in reality, this portfolio would continue to compound without being needed for anything more than perhaps to fill a small budgetary hole every now and again.
Approximately 20% of our investment portfolio is held in a taxable account and my investment in the small business with my siblings. Both of which would be easy to access without significant tax implications and no penalties for withdrawal (as would be the case from the tax advantaged retirement accounts).
Some of you may be questioning how liquid the small business investment would be, but I am certain that my siblings have the willingness and the financial condition to buy my share back and pay my wife. As a matter of fact, this point was discussed in great detail among all of us and the legal function to do so is written into our operating agreement.
In conclusion, even with a pending second child I do not see the need to buy any life insurance for either my wife or I.
- The small life insurance policy provided by our employers would be more than enough to cover burial costs, other miscellaneous “transition” costs as well as the car loan.
- The social security survivor benefits would be more than enough to cover the ongoing costs to raise our kids with excess funds that could be used to fully fund any remaining 529 account needs.
- My wife and I’s expectation would be to return to work after the early passing of a spouse which would provide more than enough income to support our lifestyle and ongoing mortgage payments.
- And lastly, our current sizeable investment portfolio would be there to fill in any needs, but would likely remain untouched indefinitely and continue to compound and grow.
Have I missed anything? What other considerations have you made in terms of whether to buy life insurance or not?
Thanks for taking a look!
The Green Swan